Oil Rally May Not Hold, Despite Iranian Tensions

Oil prices spiked more than 2 percent Monday after news flashed on the wires about a British yacht crew being detained in Iran. Traders were already on high-alert after report this morning that the Iranian government plans to expand its nuclear program.

British Foreign Secretary David Miliband apparently just told reporters about the yacht seizure and detainees today, although this international incident occurred last Wednesday.

The yacht seizure occurred before the International Atomic Energy Agency issued a resolution for Iran to stop all of its uranium enrichment activities (that happened on Friday) and before Iran announced Monday that it plans to build 10 more uranium enrichment facilities in the next 2 years.

Still, news of Britons being held captive in Iran was the trigger that sent oil prices to $78 a barrel.

"The market is clearly jittery about the Iranian situation and this adds to tensions over the nuclear issue," says Lawrence Eagles, JP Morgan's head of commodity research. However, Eagles told me that "given that it happened last week, and there is no suspicion of any other motive, it should not have a lasting impact."

CitiFutures' energy analyst Tim Evans agrees the oil market has "less potential" to rally on geopolitics these days as "inventories remain high, physical demand weak, and OPEC has anywhere from 4 to 6 million barrels per day of spare production capacity right now, nearly all of it outside of Iran."

Eurasia Group's Cliff Kupchan concurs. "I don't think this rally will have legs," he says. "Iran unfortunately detains foreigners on a regular basis and that doesn't tend to produce lasting rallies. As for the foundation for the rally—the nuclear issue—markets will soon understand that Iran can't produce what it claims it will produce."

Monday's rally basically puts oil on par with where it was on at the beginning of this month. Even with geopolitics on the front burner for a change, the spot month for crude finished up just 28 cents for November. Oil prices remain near the bottom of the trading range ($76-$82) that has been firmly in place since mid-October.